You are “Judgment Proof”
You might not have to worry about collection actions by your creditors if you do not own anything that a creditor can legally take from you, under the laws of your state. If you do not have equity in a home, money in a savings account, a valuable (and “paid for”) car, or other things of substantial value, you might having nothing to lose by simply not paying creditors. Every state has laws that allow its residents to “exempt” certain assets, up to a specified value, from being seized to satisfy unpaid debts. Usually, unsecured creditors cannot have your assets taken from you without first obtaining a judgment by filing suit against you, and then filing a request for “execution” on the judgment. An execution means that a Sheriff or Constable (depending on your state’s procedures and the size of the debt) would be directed to levy on an asset, such as personal property or a bank account, creating a lien that could result in that asset being taken and sold if the debt remains unpaid after a specified date. At that point, if everything that could be levied upon is protected by your state’s exemption, the assets would be released from the levy.
The downside to relying on this approach is that things could change, if there is a chance that your situation could improve in the near future, while a judgment can remain open against you for years. You might stop being judgment proof and become subject to potential levies on your assets in the future.
Another important consideration is whether you are receiving disturbing calls from creditors, causing you anxiety and embarrassment. If you can ignore those calls, and you do not expect to acquire valuable assets anytime soon, you might not want to file bankruptcy. Keep in mind that if you instead file for bankruptcy, the federal Bankruptcy Code offers persons in most states (e.g. Pennsylvania) the ability to exempt a wide range of assets in amounts larger than what would be available under state law as to levy, while collection calls and lawsuits are required to end, immediately.
You can settle with your creditors
If you are not “judgment proof,” because you do have assets which cannot be protected under your state’s exemption laws, it may be possible for you to work out a compromise with your creditors, whereby they agree to accept less than the full amount of the debt and forgive the rest. If you have assets which would be difficult and/or expensive for a creditor to execute on (e.g. bringing about a Sheriff’s Sale of real estate can be time consuming and expensive for a creditor), and you don’t have money in the bank with which you could pay the full amount of the debt, a creditor might prefer to accept a lesser amount by agreement, to resolve the debt. Sometimes individuals hire an attorney to negotiate with creditors, seeking that outcome. Creditors are often reluctant to give up the possibility of eventually collecting the full debt, so this is an “iffy” path to follow. They may see the value of your assets as something that would deter you from filing for bankruptcy, if the value would exceed your bankruptcy exemptions. Consequently, if your assets are not too valuable to exempt them in a bankruptcy filing, creditors are more likely to consider a settlement if they believe there is a risk that you will just file for bankruptcy and discharge the debt completely if they do not settle.
Before making a settlement with a creditor to pay a reduced amount, look in to whether the unpaid balance resulting from the agreement would become taxable income to you. “Debt forgiveness” is often includable in your gross income for income tax purposes, and creditors are required to report debt forgiveness to the IRS. There are some exceptions, but if none of the exceptions apply, you may find that you must pay income tax on the forgiven amount. In contrast, when the debt forgiveness is the result of a bankruptcy discharge, rather than by a settlement with the creditor, the IRS excludes the discharged amount of forgiven debt from your gross income.
The debts are not legally collectable
Nothing in the law makes it illegal for you to pay a debt which is too old to enable a creditor to get a judgment against you for the unpaid debt, but there are legal limits on when a creditor is able to make you pay through a lawsuit and levy. If a debt is too old to be enforceable, meaning it is past the time period provided by law to bring a lawsuit, the statute of limitations can be used to defend against any such lawsuit. In fact, it can be a violation of law for a debt collector to even threaten to sue you on a debt which has passed the limitation period. The statute of limitations is affected by how much time has elapsed since the debt was incurred, and by how long it has been since there was any activity on an account, such as a payment having been made to the creditor. If you know that the creditor no longer has the right to sue you, you may decide to ignore collection requests and not file for bankruptcy. Be aware, however, that the amount of time available for creditors to file lawsuits depends on the type of debt, as well as the laws of your state, so use caution when relying on this means of avoiding bankruptcy.
You might be able to pay your creditors, even if not “on time”
If you expect your income to increase, or your expenses to drop, or if you can afford to make payments acceptable to your creditors over time (maybe in amounts less than you are obligated to make under the terms of a loan, for instance), you might be able to avoid filing bankruptcy by simply “hanging in there,” paying what you are able, while communicating with your creditors about your situation. Don’t be surprised if debt collectors turn a deaf ear to your circumstances, as a “bill collector’s” value to the creditor is to collect money from you, not to be understanding. Still, it sometimes works out that you can get the debts paid before the creditor resorts to taking you to court.
If your debts can be managed without devastating hardship to you, it may be a bad idea to file for bankruptcy. It is possible that what you consider a lot of debt today might seem a lot different in the future, if things get worse for you financially. No one knows what the future has in store, and all too often catastrophe strikes, through illness, unexpected job loss, or divorce, to name a few unforeseeable possibilities. If you have already filed for bankruptcy before that happens, especially if you filed less than eight (8) years ago, you might not be eligible for a bankruptcy discharge when you REALLY need it.
You might be able to get a home equity loan or withdraw funds from your pension to pay off debts
This is seldom a good idea. A home equity loan results in a mortgage, usually a second or third mortgage on a home already heavily burdened from the first mortgage, and if you are unable to make the payments on the new loan, you are at risk for foreclosure. If you later file for Chapter 7 bankruptcy, the home equity loan mortgage will not be removed. In contrast, if you did not take out the home equity loan, the unsecured debts can be discharged in bankruptcy. Withdrawing funds from your pension reduces the retirement funds you will need when the time comes for you to retire, and results in tax liability for the amount which must be added to your taxable income.
When you should file for bankruptcy
If you are currently dealing with any of these: the stress of medical bills, loss of overtime hours, trying to save a failing business, using credit cards to make your monthly expense payments, borrowing from your retirement or home equity in order to pay bills, borrowing from one credit card to pay another, the threats of foreclosure or repossession, getting “payday loans,” or if you have late house, car, and utility payments, now is time to seek professional advice and file for bankruptcy, and free your mind of the hardship that you are currently facing.
Many people consider trying to get themselves out of this hole by borrowing money from a parent, sibling, or a friend. There are some things that you should consider before borrowing this money. First, some people are very charitable, even if it is to their own detriment. They may help you out even if they really can’t afford to do so. Second, there is a mixed bag of emotions that go with owing money to people with whom you are close. Are you willing to deal with the consequences of owing them money? Third, and probably most important, is that if a loan from a friend or family member is simply putting off the inevitable bankruptcy filing, you are borrowing money and possibly putting a hardship on them that could have been avoided by simply filing sooner.
DO NOT take money out of your retirement plan to pay your credit card bills. This money will be protected in your bankruptcy and you need this money for your future.
You are an individual with unique challenges; do not let anyone tell you how to live your life. You never anticipated that you would be in this unfortunate situation. You need to take care of yourself, your spouse, your children, your elderly parents, and your medical issues. Those things are all more important than some outsider’s critique.
It is a myth that bankruptcy is a bad idea. I have never had someone tell me afterward that they wish they had not filed. In fact, every one of my clients tell me that they feel relieved and their only regret is that they did not file sooner!
